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The Math of Winning in Trading — Transcript

by Mulham Trading · 2,651 words · 374 segments · language en · Watch on YouTube

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0:00Trading is basic math, and if you don't
0:02understand these four essential
0:03concepts, no matter what strategy you
0:05use or how good your setups are, you
0:08will never become a profitable trader.
0:10But once you understand them, you'll
0:11realize why most traders never become
0:13profitable, even when they're learning
0:15the right strategy. In this video, I'll
0:17show you the four mathematical concepts
0:19of winning in trading, plus one simple
0:22question that will change your trading
0:24forever. Let's start. So I want to start
0:26with these five sentences, and these are
0:28going to actually change the way you see
0:30trading. First one is most traders, and
0:32most of you actually chase perfect
0:34entries, but the real edge comes from
0:36probabilities and math. Individual wins
0:39and losses are basically coin flips, so
0:41it's a 50/50 for each trade, and
0:43long-term success is decided by your
0:46system math, and that's going to be the
0:48focus of the video, and one trade means
0:50nothing. I want you to look at the chart
0:52here, and this is probably where most of
0:55your attention goes. The strategy, 40%,
0:58indicators, psychology, risk. Meanwhile,
1:01expectancy gets almost no attention, but
1:04it's the number that tells you whether
1:05the system actually makes money. That is
1:07the problem. It's not a lack of effort,
1:09but it's a misdirection of effort, and
1:12that's why people spend years in
1:13trading, but still stay stuck, because
1:15they're focusing on the wrong thing. So
1:17let's start with expectancy, what
1:19actually makes money. Now expectancy is
1:21the only number that matters, and it's
1:24not how your last trade wins, not how
1:26clean your last five setups were, and
1:29not how confident you felt. Expectancy
1:32is simply the average profit you can
1:34expect per trade, and the formula goes
1:37like this: the win rate times the
1:38average win, minus the loss rate times
1:41the average loss. For example, an 8R
1:44system at 15% win rate sounds very bad,
1:48right? You're losing 85% of your trades,
1:51but using the math and using the
1:52formula, we can see that it can give you
1:55a positive 350 per trade. And since the
1:58math is positive, it means that you'll
2:00be profitable while losing nearly nine
2:03out of every 10 trades. Now, look at the
2:06three R system. 55% win rate at a three
2:10R, using the math is going to give you
2:12this, 1,200 per trade. That is positive.
2:16Now, looking at the one R at 70% win
2:19rate, using the math is going to give
2:20you 400 per trade. So, if you can see
2:23that 70% and 15% almost give you kind of
2:27the same expectancy. So, it's not about
2:30the win rate itself, and it's not about
2:32the R multiple itself. It's the
2:34combination of the two that creates the
2:36edge. Now, why? Why expectancy matters
2:39this much? Because it takes your entire
2:42strategy into one clear number. And
2:44instead of saying, "I think this works."
2:46you can say, "This system makes X per
2:48trade over a large sample." That is the
2:51difference. So, simply, if the
2:53expectancy is positive, I mean, you have
2:55a profitable system. Now, there is one
2:57thing that most of you forget about.
2:59Your expectancy on paper is not your
3:02real expectancy because every trade has
3:04cost. So, spread, commission, slippage,
3:08all of that cuts into the result. So, a
3:10strategy can look profitable on paper
3:13and still lose money in reality because
3:15you're not taking these into account.
3:17Now, let's look at this graph here
3:19because this is where most of you
3:20actually give up, or maybe get fooled.
3:22For the first maybe 10 or 20 trades,
3:25you're not seeing much results, so
3:27you're not or you cannot say if this
3:30system is good or bad. Only after when
3:32we have a large sample, the truth
3:34appears. So, right here, you cannot say
3:37if you have a profitable system or not.
3:39Sometimes it's going to go like this and
3:40go up and a lot of noise, but I'm having
3:43here a perfect scenario. But only after
3:45a large sample, the expectancy appears.
3:48And now, after maybe 100 trade, you can
3:51for sure say that, "Okay, this is
3:53unprofitable system and this is
3:55profitable." You might be walking away
3:57from a perfectly good edge. So, maybe
4:00it's going to start like this, but then
4:01go up and it's going to be profitable.
4:04You just quit before it start revealing
4:06itself. And I want you to remember this
4:08because that's going to connect directly
4:11to variance, which we're going to be
4:12covering later. So, now the question
4:14becomes, how do you actually build a
4:16profitable system? The answer is a
4:18trade-off. One that most traders never
4:20fully accept. There is no perfect
4:22strategy. Every system comes with a
4:24trade-off. Higher reward usually means
4:27lower win rate, and higher win rate
4:29usually means smaller reward. That is
4:31the reality of trading. And this is
4:33where many traders get stuck because
4:35they keep looking for a system that
4:37gives them both. It does not exist. Now,
4:39based on the chart, we can see the
4:40expectancy per trade for different
4:43system. This system has an 8R and 50%
4:46win rate, and we're going to be covering
4:47the uh relationship between the two.
4:50This has a 6R and 30% win rate. So, if
4:53you notice, these are very close to each
4:55other. This is a 6R 30%, this is a 3R
4:5955%, and even there is a big difference
5:01when it comes to the win rate, but
5:03they're very close when it comes to the
5:05expectancy. And even a 15% win rate and
5:08a 70% win rate are also very close to
5:11each other. Now, look at the chart here.
5:13This is the reward to risk here and the
5:16win rate here. As the target gets
5:18bigger, the win rate drops. And that's
5:21not because you're doing something
5:22wrong, but because that's how the market
5:24work. The further price has to travel,
5:26the less often it gets there. Now, the
5:29sweet spot would be somewhere in here,
5:30on the middle. You don't want to go
5:32really here or a 1R and 70%. You want to
5:36be in the middle. So, coming back to the
5:37sweet spot again, and that's where the
5:40math and reality meet. It's not the most
5:43exciting strategy, not the most
5:45impressive back test, but the one you
5:47can actually execute over hundreds of
5:49trades, and that's what you're looking
5:51for. So, if we notice here, the sweet
5:53spot would be somewhere in the middle
5:55here. I mean, if you can be very close
5:57to the dark spot or the dark color,
6:00that's going to be the best one, but
6:01that's not realistic. But, the sweet
6:03spot is to be in the middle and very
6:05close to the dark color. You could be
6:07having a 40% win rate and maybe a 4R,
6:11that's going to be good. 50% win rate,
6:133R, 4R, that is good. Improvement in
6:15trading would be going to the right top,
6:17increasing the win rate and the reward
6:20to risk, but you should be realistic.
6:22And I want to tell you that you do not
6:23need to win as often as you think. And
6:26this is the breakeven formula, so you
6:28can actually apply this to your R. So,
6:30if you're focusing you on 5R, you apply
6:33this and you get definite result. So,
6:35applying the formula, if your target is
6:38one reward to risk, then you need 50% to
6:41break even and above 50% to win. But, at
6:444R, you only need above 20% to win. So,
6:48think about that. You can be actually
6:49wrong most of the time, 80% of the time,
6:52and still not lose money. Variance. Why
6:55traders emotionally fail. Now, this is
6:58where many traders emotionally fall
7:00apart even when they're doing everything
7:02right. So, variance actually change a
7:04lot about you. Now, look at these three
7:07curves. These are based on the same
7:09system, same rules, and same expectancy,
7:12but completely different experiences.
7:15One gets a smooth ride to the upside,
7:18one gets a brutal drawdown, and one
7:21lands somewhere in between. Now, imagine
7:23that you are the trader in the drawdown.
7:26You'll be questioning everything and
7:27you'll be looking for a new strategy,
7:29wondering if the edge stopped working.
7:32Meanwhile, someone else is trading the
7:34exact same system and having different
7:37results and winning from the beginning.
7:39That's what the is. And this is one of
7:42the hardest truth in trading. You can
7:44basically do everything right and still
7:46lose. So, you get the right entry, the
7:48right stop, the right target, and you
7:49execute your trading plan, and still
7:52lose seven trades in a row. Now, simply
7:54variance means that short-term results
7:56are not everything. They don't tell you
7:57everything. You can also break every
7:59rule and win five trades in a row, and
8:02that is very dangerous. And short-term
8:04results outcome prove nothing. Only a
8:06large sample tell the truth, and that
8:08also applies to expectancy. We know that
8:11one trade means nothing, and also a
8:13small sample means nothing. Now, a lot
8:16of time, your [clears throat] mind will
8:17start playing games, and it's going to
8:19trick you. So, I'll be having one loss,
8:22maybe two losses, three losses, and when
8:24you have four losses in a row, you would
8:28think that now the next one would have a
8:31much higher probability to win, and
8:33you'll be saying to yourself and
8:34thinking, "Okay, the next one has to win
8:37because now I'm having four losses in a
8:39row." So, you increase your size, you
8:42take more risk, you go more aggressive,
8:44and then it's a loser again. What we
8:47need to understand from this, and that
8:48is what gambler's fallacy is, that every
8:51trade is still independent. Even if you
8:53lose five trades before it, the next
8:55trade is still a 50/50. It's a coin flip
8:58again. So, I want you to be careful. It
9:00does not matter how much losses you have
9:02taken in the past, the percentage of win
9:04rate for every trade is still 50% and
9:07not after four losses it goes to 82% or
9:1191% after five losses. No, it still stay
9:14the same as 50%. Now, we get to a risk
9:17because none of the math we've covered
9:19matters if you don't survive long enough
9:22for the edge to play out. Position
9:24sizing is where discipline becomes
9:26visible. So, every trade has a different
9:29stop loss size. Every risk in dollars
9:31must stay the same. Bigger stop losses
9:34mean smaller position size, and smaller
9:36size equal larger position size. So,
9:40from this, that means the dollar risk or
9:43the percentage stay the same while
9:45everything can change, and we need to
9:47adjust accordingly. Now, why your risk
9:49per trade matters so much? Because if
9:51you're risking too much, even a normal
9:53losing streak becomes dangerous. If
9:56you're risking small enough, you give
9:57your edge room to breathe. So, what I
9:58suggest is go from 0.25%
10:02to 2% risk per trade. That is the
10:04maximum and a one bad week or bad month
10:07will not just destroy everything. So,
10:10what you can do is, and that is what I'm
10:11the most important part of this video,
10:13is position sizing. So, use a position
10:16size calculator. You could be using
10:17this, and that's the link. So, you go
10:19and have the account currency, the
10:21account balance, the risk percentage.
10:23So, you have $100 in your account, you
10:25put 100 or 1,000, your risk percentage
10:280.5%, and then your currency pair. So,
10:31I'm trading Euro dollar, and then the
10:33stop loss size is 25 pips. You press
10:36calculate, and that's what you get. So,
10:38you're basically risking $5 of your
10:40account, and then you come here to the
10:41standard lot, and that's what you're
10:43risking. So, you should enter the trade
10:45with 0.02 lot size. Or, you could do one
10:49simply on TradingView. So, you have this
10:51indicator called lot size calculator.
10:53You simply apply this and adjust
10:55accordingly, and it's going to show you
10:56everything. So, you adjust the settings,
10:58and it's going to give you the lot size
11:00here. That is what you're going to be
11:01risking. Now, even the worst losing
11:03streak is temporary if you have a valid
11:05system. So, a losing streak is not a
11:07problem, but your position size is. If
11:10you can control your risk, a losing
11:12streak hurts. So, if you can notice, it
11:14hurts, and you have some drawdown here,
11:17but you can still survive this. But, if
11:19you're risking too much here, you'd lose
11:20everything. So, calculating the risk in
11:23order for this drawdown, if it happens,
11:25you don't lose all your money, but you
11:26can still recover and then have a
11:29profitable system after that. Now, risk
11:31of reward. let's look at these numbers
11:33here. The higher the risk, so this is
11:36what you're risking here, 0.5, 1, 2, and
11:385%. The higher the risk, the faster the
11:41probability of ruin explodes. So, here,
11:44that's the probability of 50% drawdown.
11:46Notice how it explode to the upside
11:48aggressively. So, notice the difference
11:50between 1%, 18, and 65%. This is not an
11:54opinion and not psychology, but this is
11:56basic math. And if you understand this,
11:58you understand survival, which is the
12:01foundation of everything in trading.
12:03Now, losses and gains are not equal. In
12:06this case, the math works against you.
12:08So, a 10% loss need 11% to recover, and
12:12it's not only 10%, but as the loss gets
12:15bigger, then you need more to recover.
12:17For example, 30% loss need 43% to
12:20recover, 50% loss need 100% to recover.
12:24Let me think about that. The moment you
12:26lose half of your account, the market
12:29now expects you to double it just to get
12:31back to zero. That's huge. And that's
12:33why protecting your capital matters so
12:36much. So, after everything we covered,
12:38all of the concepts, I know you
12:39understand them. The question becomes
12:41simple, what changes now? What to do?
12:43And I want you to be honest with
12:44yourself here. Now, math could be one of
12:47the problems, psychology could be one of
12:49the problems, but in this video, we're
12:51going to be focusing on psychology, but
12:52you can take this question and apply it
12:54also to any aspect of trading. So, what
12:57is the one thing you know you're doing
12:58wrong that if fixed would completely
13:01change your trading? You probably
13:03already know the answer, and if you sit
13:05with it, you would find an answer, and
13:07that answer could change your trading
13:08forever. This could be judging your
13:10system after a few trades, risking too
13:13much to feel something, so you're
13:15actually seeking emotions instead of
13:17trading the market. Is it confusing good
13:20outcomes with good execution? Is it
13:22abandoning your edge when variance
13:24appears? Or is it chasing certainty in a
13:27game of probabilities? It could be one
13:29of these or it could be something
13:30different. So, you have your own answer
13:32and you could actually write it in the
13:34comments for people to get inspired. And
13:36instead, and that's what you can do
13:38regardless of the answer to the
13:39question, you want to think in
13:41probabilities and not outcomes. You want
13:44to judge your edge over a large sample.
13:47That's how you actually allow the math
13:48to work in your favor. You risk small
13:51enough to survive the variance. You
13:53should know that consistency beats
13:55perfection and your job is execution and
13:58not prediction. So, that's it for this
14:00video. I hope that you learned something
14:02new. If you want to learn my trading
14:03strategy, make sure to check out It's
14:05School. The link is in the description.
14:07Leave a comment with whatever question
14:09you're having. Like and subscribe to the
14:11channel. That's it and I'll see you in
14:13the next one.

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